**As seen in Risk In The Week report 03/24/25, get access now! cablefxm.co.uk
The February Banxico monetary policy meeting saw the
central bank lowered its benchmark interest rate, known as the overnight interbank rate, by 50 basis points from 10.00% to 9.50%. This decision was unanimous among the five-member governing board and marked an acceleration of the easing cycle that began in March 2024, when the rate was cut from its record high of 11.25%. The move followed five consecutive 25-basis-point cuts in 2024 to net 150bps of easing over this cycle. Several factors drove the February decision. Annual headline inflation had slowed to 4.21% in December 2024, the lowest in nearly four years, edging closer to Banxico’s target range of 3% +1%. Core inflation, however, ticked up to 3.65%, signaling persistent underlying pressures. The bank noted a weaker economic outlook, with GDP
contracting slightly in Q4 2024, alongside a depreciating Mexican peso (down 22.93% against the dollar in 2024).
For March, a 50bps rate cut is widely expected, the desk at UBS thinks local rates still offer value: 1) the Mexican economy is potentially heading to a recession this year; 2) core inflation is likely to stay within target; and 3) Taylor rules models show Banxico may cut 50bp or 100bp below the 8% terminal rate priced by markets (UBS estimate 7.5%). Against this backdrop, UBS stays long 5y rates, targeting 50b more of compression for this sector of the local curve.
Economists at Wells Fargo list their reasons for the Mexican central bank to deliver a rate cut of this magnitude in March and expect another 1/2 of a percent move in May. They say that escalations in the U.S.-Mexico trade tensions sparked by recently-implemented U.S. tariffs on Mexico, they are becoming more pessimistic about the prospects for the Mexican economy this year. Wells Fargo has maintained their forecast for the Mexican economy to fall into recession this year. In addition, they recently further downgraded our forecast for 2025 Mexico GDP growth to 0.1%, teetering on the brink of negative growth for this year as a whole. Last, Wells Fargo noted that the Mexican peso has been reasonably stable on balance against the dollar this year, trending broadly sideways before strengthening somewhat in the past week or so.
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